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The federal funds rate in the post-Volcker era: evidence from Basic VAR

Jamilov, Rustam (2011): The federal funds rate in the post-Volcker era: evidence from Basic VAR.

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Abstract

This paper proposes a comparative analysis of the federal funds rate. The analysis is based on the results of an empirical study, conducted using the econometrics of Vector Auto Regressions. The results are compared across two time periods: 1960-1979 and 1983-2002, the intervals representing the pre and post-Volcker monetary eras. The study examines the degree of exogeneity of the federal funds rate and its power to explain and predict variations in macroeconomic aggregates. The paper concludes that for the post-Volcker era the federal funds rate has become more exogenous; that the federal funds rate has remained a strong economic indicator; that the notion of “lean against the wind” monetary policy continues to be relevant and appropriate; that the “price effect” of the response of inflation to innovations in the federal funds rate has become smaller. The paper also suggests that the Federal Reserve has since the 1980s initiated the practice of countercyclical monetary policy, and that economic cycles have tightened during the post-Volcker era.

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